Wednesday, July 21, 2004

Causing recession to fight inflation - again The last time Alan Greenspan smelled inflation he threw us into a recession from which we have not yet fully recovered. The way the government fights inflation is to throw people out of work. Inflation occurs when spending or demand starts to outpace supply. For instance, with SUVs so popular, the auto companies make their highest markup on these type of vehicles. I remember the time when the Honda Accord and Preludes were first brought into this country. They were so hard to get, people were bidding for them over the sticker price. Beef has more than doubled in price in the couple of years since the low carb revolution increased demand. Beef producers have been known to manipulate the price by holding beef off the market as well. There is a tipping point when enough of the items we all need start to rise in price and labor is nearly fully employed we get inflation. Throwing people out of work is the easiest way to slow demand. Creating a recession is how we throw people out of work. Inflation is a bad thing because earnings buy less. If you are fortunate enough to have some saved or inherited waelth, then its value and future purchasing power goes down. There are horror stories of inflation run riot in other countries at other times. But how do we fight it. The Federal Reserve, still led by Alan Greenspan raises interest rates on the short term borrowings of banks, This ripples through the economy. It becomes more expensive to borrow money. Businesses put off expansion even in the face of rising demand. Inevitably some people lose their jobs. It is a conscious act of our government to put people out of work. People with no jobs don't buy new cars, refrigerators or washing machines and they certainly are not bidding up the price of new houses. They eat less steak. The democrats will extend unemployment benefits, but with the country having moved to the right politically, the republicans only begrudingly fund the "safety net". The long term unemployed lose everything. In the late 90's with nearly full employment (for various reasons 4% unemployment is for all purposes full employment.) the federal budget was in surplus and no actual inflation was in sight. Alan Greenspan,  the Fed chairman looked into his crystal ball and saw inflation on the horizon. To slow down the economy he raised interest rates. Commentators talked about a "soft landing" in which inflation would be checked and employment would remain high. It was not to be. Greenspan wasn't happy with mild raises. He kept raising rates until the economy started to slide. Why would he do this? He did it because to an economist employed by the government, fighting inflation or protecting already accumulated wealth is more important than protecting jobs. We had the shocks of 9/11 and the dot com bust. Those were the normal dangers of life. But government action was not taken to protect jobs, it was taken to protect wealth. Of course saying this opens one to charges of class warfare with the scent of left wingism. But, I do not come from the left. I am absolutely commited to the idea that capitalism is the best way assure the economic well being of a society. I just see this unfairness, that a very small segment of the population, just 3 or 4 % of the workforce, was thrown out of jobs to protect the value of the wages of the rest of us and the value of already accumulated wealth. Of course the emotional stress on the rest of the workforce increased immeasurably and many of us have seen our real wages shrink because we are competing against each other for fewer remaining jobs.. Most Americans seem to blithely accept this Darwinian manner of running the economy as part of life and are willing to take their chances. But now we face real inflationary pressures. Alan Greenspan needs no crystall ball. We all see it coming (Except of course for the Bush administration running for reelection) Greenspan is once more starting to raise interest rates. Many of us have not gotten back to work from the last layoffs. Some of us have just barely gotten started again. Many of us have given 10, 20 40 percent extra time for free to impress our employers to make sure we were not laid off. How many homes have broken? How many of us had heart attacks along the way? All the while we have watched our employers look elsewhere for cheaper labor. All the while we have watched our government do nothing but lower taxes on the wealthy. All the while we have waited years for the economy to turn. And now when we just have a foothold back it is starting all over again. But it is all right, only a small percent will actually lose their jobs and the rest can go along believing they are exempt. Or maybe I'm wrong. Maybe this time it will be the Big One, another great depression. Melvyn Polatchek 4:27:52 AM    comment []